Annaly, AGNC Investment upped, Claros, ACRE, Velocity cut at Wells Fargo

Wells Fargo upgraded Annaly Capital Management (NYSE:NLY) and AGNC Investment (NASDAQ:AGNC) to Overweight and downgraded Ares Commercial Real Estate (NYSE:ACRE), Claros Mortgage Trust (NYSE:CMTG), and Velocity Financial (NYSE:VEL) to Underweight as analyst Donald Fandetti assessed the impact of the Federal Reserve’s 50-basis point rate cut on mortgage REITs.

After agency mortgage-backed securities REITs underperformed through the rate hike cycle, “we now see a favorable risk/reward for the shares, including double-digit dividend yields,” the analyst wrote in a note to clients. Historically, agency MBS REITs Annaly (NLY) and AGNC Investment (AGNC) have performed well when the central bank is reducing rates. “Agency MBS spreads are still wide and banks could start buying after big hits from mark-to-market,” he said.

He lowered ratings on Claros (CMTG) and Ares Commercial Real Estate (ACRE) as “we believe both will struggle to get back on offense, plus they face more book value risk vs peers.” Specifically, ACRE has the largest office exposure at 37% vs. its peers at 10%-26%, and CMTG has a larger weight to construction loans at ~12% and 4/5-risk rated loans are 35% of its portfolio, well above peers, Fandetti said.

Meanwhile, he cut Velocity Financial (VEL) to Underweight largely on valuation.

The analyst raised price targets on commercial mortgage REITs Starwood Property Trust (STWD) to $24 from $22 and on Blackstone Mortgage Trust (BXMT) to $22 from $19. “Fed cuts help credit and should drive improvement in CRE debt markets/ LTV’s,” he said.

Wells Fargo’s Overweight ratings on Annaly (NLY) and AGNC (AGNC) align with the average Wall Street ratings on both companies, and the Underweight ratings on Claros (CMTG) and ACRE (ACRE) contrast with the average Wall Street rating of Hold. Meanwhile, the SA Quant system rates Velocity (VEL) a Strong Buy, as does the average Wall Street rating.